As the bitcoin price roared higher and higher over the last year, cryptocurrencies started to turn heads in the financial industry. Now institutional investors are scrambling to make decisions about cryptoassets, including whether to buy any, and if so, whether to buy bitcoin or another cryptocurrency directly or whether to gain exposure through indirect means.
However, so far most institutional investors are holding back on cryptoassets, and the reasons are more plentiful than many realize.
In a recent note, Canaccord Genuity analyst Michael Graham released details from a recent conference call with Ledger founder and CEO Eric Larcheveque. The firm is a developer of infrastructure and security solutions to support cryptoassets. He explained why institutional investors have been steering clear of cryptocurrencies so far, and it’s about much more than security, as history has demonstrated how easy it is for cyber-thieves to pick the pockets of bitcoin owners.
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Larcheveque also spoke about the regulatory and reputation risks associated with including cryptoassets in a portfolio. He sees these as the two biggest barriers to wider adoption of them among institutional investors. He notes that South Korean and U.S. regulators have given more favorable news on cryptoassets, but despite the more positive news, there remains much uncertainty on multiple issues. For example, regulators have yet to decide whether cryptoassets should be considered securities or to rule on taxation of them.
In addition to the regulatory questions, Graham said major institutional investors “continue to fear the risk of damaging their reputation investing in a volatile asset class that has seen its share of unfavorable headlines.” However, he estimates that if or when the reputation and regulatory risks pass, institutional investors could inject $10 billion to $20 billion into cryptoassets, possibly by the end of this year. So far, the asset class has racked up only about $6 billion in net inflows, Graham estimates. He feels that bitcoin and other cryptocurrencies could be especially attractive to institutional investors because of their lack of correlation to almost every single other asset class.
Another major development that could impact the cryptoassets is state-backed cryptocurrencies. JPMorgan CEO Jamie Morgan has derided those who invest in bitcoin or other cryptocurrencies, but he believes in the use of blockchain technology for intrabank transfers or for cryptocurrencies that are backed by a fiat currency.
Graham states that Russia and China seem to be the most adamant about the idea of state-backed cryptocurrencies, which means there could end up being a “cryptoruble” or “cryptoyuan” within the next 12 to 18 months. It’s expected that state-backed cryptocurrencies would be backed by the issuing nation’s fiat currency in order to provide both recognition as legal tender and “the advantages of employing smart contracts available on blockchain-based cryptocurrencies.”